Tax warning for dividend payouts in South Africa

 ·5 Apr 2024

Consultancy firm PwC has warned that an important change to the income tax provisions dealing with preference share dividends has been implemented in South Africa, and companies should consider the impact of the amendments.

An amendment has been made to section 8EA of the Income Tax Act No. 58 of 1962 that will impact all dividends, including foreign dividends, received or gained from years of assessment starting on or after 1 January 2024.

Section 8EA is an anti-avoidance rule.

PwC said this means that dividend yields on third-party-backed shares will be deemed as income unless the funds acquired from the issuance of the third-party-backed shares are utilised for a qualifying purpose (as defined in the Act).

PwC added that dividends can only be exempted and excluded from income if the person who acquired the relevant equity shares in the targeted operating company meets an ownership requirement at the time of receipt or accrual.

This means the person must hold the equity shares in the operating company, directly or indirectly.

“Therefore, tax consequences will now arise on a dividend declared by the issuer of a preference share, which was issued for the specified qualifying purpose after the shares in an operating company financed by the preference share funding were disposed of, unless certain requirements are met,” the firm said.

The exemption under section 8EA will still apply in the following situations.

  • The equity shares in the targeted operating company were disposed of, and the funds derived from that disposal were used by the issuer of the preference share within 90 days of that disposal to redeem that preference share.
  • The equity shares in the operating company were listed shares that were substituted for different listed shares in terms of an arrangement announced and released as a corporate action.

PwC has advised companies with a substantial preference share book should especially be mindful of this amendment.

“Companies receiving preference dividends should consider the impact of the amendments and implement processes regarding shares that meet the qualifying purpose test.

“This will ensure they are still held directly or indirectly by that person at the time of the receipt or accrual of that dividend or that the relevant exceptions to this rule apply,” it said.

The firm stated that this may require a review of all preference share funding arrangements where the exemption for qualifying purposes was relied on.

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